Broking firm ICICIdirect gave following rationale and strategy to go long on HDFC Bank and short Nifty:
Parameters:
Current Price Ratio (Nifty /HDFC Bank): 9.15
Target: 8.23
Stop loss: 9.60
Rationale:
> Private banking stocks had gone into time correction since the election outcome rather than any major price correction. In the Nifty consolidation, traders closed some long positions in HDFC Bank but it absorbed the selling pressure quite well. Strong hands still seem to be on the long side as the total open interest is near all-time high levels. It has been on an increasing trend since the FII investment limit was hit in the stock in the cash segment
> From the February to the May series, the open interest increased quite sharply by 300% in the stock. Since May 20, there has been long liquidation to the tune of 22%. In addition, traders formed shorts in the stock as it was underperforming the broader market during the Nifty upsides. However, it showed resilience and held the critical support of Rs 810. Due to this, shorts have recently started getting closed, which may be a short-term trigger for the stock.
> The short straddle in HDFC Bank was formed at the 750 strike with 3000 contracts each in Call and Put options in the June series. It was of 1600 contracts each at the same strike in the May series also after the election outcome. The total premium of this straddle pricing was Rs 70. That is why the stock found it tough to move above Rs 820 levels and consolidated for a couple of months near Rs 820. We have seen initial signs of recovering in the stock above this price as short straddles have not been formed in the July series
> The crucial 50 DMA for the stock is placed near Rs 820, which would remain a major support. Since it surpassed this average price in June, 2012, it has respected this moving average. Even in the recent downtrend, the stock absorbed the selling pressure at these levels and is showing signs of reversal again from this average
> From the beginning of the year, the price ratio (Nifty/HDFC Bank) has been witnessing pressure on the higher side and despite repeated attempts failed to move above its previous highs. A downward trending line is acting as a resistance for the price ratio. We expect it to decline further towards 8.3 levels in the near term due to outperformance of HDFC Bank over the Nifty
Strategy: Buy HDFC Bank August futures at Rs 845-850 and short Nifty August Futures at 7,780-7,800.
